Mutual Fund smallcases by Windmill Capital: Better Portfolios, Less Clutter

Most investors who use mutual funds have the same story. They started an SIP in a large-cap fund a few years ago. Then a colleague recommended a midcap fund that had just delivered great returns. Then there was a tax-saving deadline in March, so they put some money into an ELSS. Somewhere along the way, they read about a flexi-cap fund and added it too. And then some cash sat idle in the savings account, never moving.

Today, they have five funds, four AMC apps on their phone, no idea how the funds are performing relative to their peers, and ₹3 lakhs in a savings account earning 3%. This is not a failure of intent. It’s a failure of structure. Windmill Capital’s Mutual Fund smallcases are designed to fix exactly that.

What are Mutual Fund smallcases?

A Mutual Fund smallcase is a curated, research-backed basket of actively managed mutual fund schemes within a specific category, Large Cap, Mid Cap, Small Cap, Flexi Cap, Multi Cap, or Tax Saver (ELSS), combined into a single, investable portfolio.

Instead of picking one fund and hoping it continues to perform, you invest in a basket of 3 to 4 funds, equally weighted across fund houses. The basket is monitored continuously and rebalanced when needed. You can do a lump sum or set up an SIP. Holdings sit directly in your account, so this is not a fund-of-funds.

The execution experience is the same as with any other smallcase: invest with a click and review and rebalance when recommended, no juggling four AMC apps or tracking NAVs separately.

The problem with picking a single fund

Choosing one fund and staying with it is not conviction; it’s usually just inertia.

The reality is that fund performance is far less sticky than investors assume. A fund in the top quartile of its category over three years has no reliable guarantee of staying there in the next three years. Fund managers change. Investment style drifts. What worked in a bull market might lag in a different cycle. Individual funds also carry concentration risk in specific issuers and sectors, particularly in those where their stated category mandate may not always be reflected.

Holding a focused basket of 3 to 4 funds within the same category helps in two ways. First, it reduces dependence on any one fund manager’s calls. Second, and more importantly, when evidence emerges that one fund’s risk-return profile is deteriorating relative to its peers, the portfolio can shift rather than passively wait for a recovery that may or may not come.

How funds are selected

First, within each category, we select only actively managed, direct-plan, growth-option schemes with at least 3 years of performance history. Schemes that do not allow SIP are not considered.

From there, Windmill’s research process puts every fund through a quantitative screen across more than 100 performance and risk factors, absolute returns, rolling returns across different time periods, downside capture, volatility measures and risk-adjusted ratios. After testing for predictive power, about 10 factors emerged as consistently effective at identifying funds likely to outperform their category benchmark and median peer over time.

This is followed by a qualitative review of each fund’s current portfolio, looking for unusual sector concentrations, style drift, or changes in fund manager behaviour that return history won’t yet reflect. A fund has to pass both layers to make the cut.

The smallcases are all equally weighted. So a single scheme’s returns cannot dominate the outcome. 

Rebalanced will be triggered-based, not at regular intervals. We at Windmill Capital will monitor the funds and will recommend changes only when the funds relative risk profile changes drastically or there is uncertainty due to changes in fund management style, investment policy or fund manager. Our aim is to keep the churn low, as frequent and unnecessary switching in equity funds creates capital gain events and reduces investor returns.   

A structured alternative for your sitting cash

The equity family handles long-term money. But there’s a separate problem that most investors quietly ignore: what to do with money that isn’t being deployed right now.

Such money usually sits in savings bank accounts because it is the most convenient option. An SB account these days offers an interest rate of 3-4% per annum. The next best thing to SB accounts, money market instruments, have been offering higher returns at the same near-zero risk. While on a day-to-day basis, the difference in interest might not be drastic, consider ₹5 lakh sitting idle for months on end, and the numbers add up.

Windmill’s Cash Management smallcases are a structured alternative to the default savings account. There are five of them, mapped to different time horizons:

The tax angle at the one-year end

Ultra-short-duration funds, such as the Park Cash — 1 Year, are classified as debt funds under Indian tax law. Gains are taxed at your marginal tax rate, regardless of how long you hold them. If you’re in the 30% bracket, that’s 30% on your returns.

Park Cash – 1 Year (Tax – Smart) includes arbitrage funds. Under tax laws, these funds are classified as equity funds because they hold more than 65% of their assets in equity-related instruments. Hence, the short-term capital gains on these funds are falt 20%, whereas long-term capital gains are taxed at 12.5%

So for an investor in the 30% bracket, two funds earning roughly the same pre-tax return deliver very different outcomes post-tax. The arbitrage fund keeps a significantly larger share of the return. For an investor in the 20% bracket or below, the math reverses; the simpler debt fund wins. It’s worth thinking about which camp you’re in before parking money at the longer end.

One important thing to note: for shorter durations of under 6 months, arbitrage funds can be volatile and may lag debt funds. So for anything under 6 months, going the debt category smallcases is the correct thing to do, regardless of tax bracket.

The smallcase execution advantage

Both the equity and cash management mutual fund smallcases offer the same advantage of the smallcase format. Investments can be made with a few clicks. When one has to rebalance their smallcase, it can be done in a single step.

So, how do you use this?

The equity family is straightforward. Decide which market-cap exposure you want, then invest in that basket. Let Windmill monitor the underlying funds and tell you when something needs to change. Set up an SIP if you want to invest systematically. You don’t need to track individual fund NAVs or wonder whether your fund manager has changed.

The cash management family is even simpler. Pick your time horizon. If it’s under a week, use Park Cash – 1 Week. A week to three months, use Park Cash – 3 Months. Three to six months, Park Cash – 6 Months. For 6 months to 1 year, look at your tax bracket and pick accordingly.

That’s the whole decision.

_{Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of a SEBI recognized supervisory body (if any) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.}

_{The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary.}

_{Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.}